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Analysis: HP - Dial "M" for mayhem Free games boost gaming industry revenue Apple working with suppliers on new iPad: report Missouri teachers sue to block social media law Video: Texting as a competitive sport More technology news Follow Reuters Facebook Twitter RSS YouTube Read Gaddafi son Saif at Tripoli hotel after arrest report | 22 Aug 2011 The Kardashian Nuptials -- Wretched Excess of Charity Cheapskates? 22 Aug 2011 Goldman CEO hires prominent defense lawyer | 22 Aug 2011 Kardashian Wedding Leaves Santa Barbara Police Fielding More Than 20 Calls 22 Aug 2011 Son rallies loyalists for Gaddafi's Tripoli fightback | 3:26am EDT Discussed 259 GM says bankruptcy excuses it from Impala repairs 244 UPDATE 3-White House denounces Perry as Republicans target Fed 153 Obama accuses Congress of holding back U.S. recovery Watched Una Healy got naked on holiday Sat, Aug 20 2011 Lockheed Martin presents airship of the future Thu, Aug 18 2011 Muammar Gaddafi's son Mon, Aug 22 2011 Redemption clock for eHarmony is ticking Tweet Share this Email Print Related News Angry Birds exec says company worth billions: report Thu, Aug 18 2011 Special Report: The bonds that turned to dust Mon, Aug 15 2011 Special report: The perils of Paulson Wed, Aug 10 2011 China's Everbright delays $6 billion offer; rout hits IPOs Fri, Aug 5 2011 Insight: Wall Street slide sends waves across economy Fri, Aug 5 2011 Analysis & Opinion Flickr founder looks to strike lightning again 5 things entrepreneurs need to know about valuation Related Topics Technology » Deals » Global Deals Review: 2011 Q2 » Global Deals Review » Inflows Outflows » By Alistair Barr SAN FRANCISCO | Mon Aug 22, 2011 6:42pm EDT SAN FRANCISCO (Reuters) - Two of eHarmony Inc's main backers stand to gain extra leverage over the online-dating company in early November when redemption rights from its last financing round kick in -- an unusual development in the venture capital business. The rights come into play after November 5 for Technology Crossover Ventures and Sequoia Capital, which invested when eHarmony raised $110 million in 2004. The firms will have the right to require eHarmony to buy back their preferred shares in four quarterly installments, according to eHarmony's certificate of incorporation. The company would have to pay $8.0158 for each preferred share being redeemed, matching the price of the original $110 million investment, or a "fair market value" agreed by eHarmony's board of directors and holders of most of the stock being bought back -- whichever is greater. If the two sides can't agree, they have to appoint an independent appraiser to establish a value for the securities in 20 days, the certificate says. "It's very rare that these redemption rights are actually exercised," said Curtis Mo, a Silicon Valley partner at law firm DLA Piper. "More often, if a company or management isn't performing, investors can use looming redemption rights as leverage to force some action like a sale of the company." Redemption rights were included in fewer than one-fifth of venture capital financings in the second quarter of 2011, according to law firm Fenwick & West. What's more, it's unusual that they kick in. Redemption rights are more common in late-stage financings, where venture capital firms like TCV offer some liquidity for company founders, according to Louis Lehot, a partner at law firm Sheppard Mullin. "I can't recall a circumstance where they came into play -- in other words where the securities were redeemed," Lehot added. "They often cause some sort of non-public settlement ahead of time, like the company agrees to do an IPO or agrees to be sold." However, a secondary market for stakes in private companies has emerged in recent years, giving founders and employees a new way of selling their stock. That's reduced pressure on management to work toward an IPO or sale. "Company founders are no longer feeling the pressure to exit -- nowhere near as much as their venture capital backers," Lehot told Reuters. "There have been a number of liquidity transactions in the last couple of years. VC firms are very frustrated." Mo and Lehot weren't talking specifically about eHarmony. However, eHarmony shares have been posted for sale on a secondary market run by SharesPost at least three times since the middle of 2009. One completed secondary transaction in eHarmony shares from April 2009 is also listed on SharesPost. EHarmony has been considered an IPO candidate for several years, although speculation about such an exit has died down a little recently, according to Anupam Palit, a senior equity analyst at GreenCrest Capital Management, which researches private, venture-backed companies. "We view the company as a potential takeout candidate," Palit wrote in an April report that valued eHarmony at about $800 million. EHarmony declined to comment, as did TCV and Sequoia. EHarmony has less than $200 million on its balance sheet, so it probably wouldn't be able to meet redemptions without borrowing some money, Palit said in an interview with Reuters on Monday. "I don't think that this means they would IPO because of this redemption issue," Palit added. "They would have to file very soon to go public in November." Earlier this month, eHarmony hired Zynga executive Jeremy Verba as chief executive. Verba left Zynga soon after the social-gaming company filed for its own IPO. "The new CEO needs to establish himself and build a reputation with investors before an IPO," Palit said. "However, he has some experience helping to prepare a company for a public offering." (Editing by Steve Orlofsky) Technology Deals Global Deals Review: 2011 Q2 Global Deals Review Inflows Outflows Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (0) Be the first to comment on reuters.com. Add yours using the box above. Social Stream (What's this?) 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